Authors Support
- Michael G. Colantuono, JD, Colantuono,
Highsmith & Whatley, PC
- Lynn Silver, MD, MPH, Public Health Institute
Contributors
- Alisa Padon, PhD. Public Health Institute
Getting it Right from the Start
A project of the Public Health Institute
555 12th Street, Oakland, CA 94607 www.gettingitrightfromthestart.org
Telephone: 510.285.5648 Fax: 510.285.5501 Email:
Support for this work was provided in part by theRobert Wood Johnson Foundation. The views expressed here do not necessarily reflect the views of the Foundation.
Note
This model ordinance is not intended as legal advice. For legal advice, readers should consult an attorney licensed in their state.
Introduction
This Model Local Cannabis Taxation Ordinance was prepared to help California cities and counties respond to the legalization of recreational cannabis approved by voters in 2016, the earlier legalization of medical cannabis, or both. It taxes only commercial activity, not the personal use permitted by Proposition 64 that involves no exchange of money or other value. Local jurisdictions must decide whether (1) to do nothing, in which case businesses may apply for a state license to sell cannabis starting January 1, 2018; (2) to ban the sale or manufacture of cannabis locally; or (3) to develop their own rules and regulations to govern the cultivation, production, sale, marketing and taxation of this product in their community. Alternatively, communities may decide to take more time to craft local policy through a temporary ban on certain cannabis business. Most communities opting to allow cannabis businesses to operate will tax those businesses. This Model provides an approach to local taxation that seeks to generate revenue to mitigate negative social and health effects of the cannabis industry, address other community needs, discourage youth and problem use of cannabis, particularly of more-dangerous, high-potency products.
The Model was developed by the Public Health Institute’s Getting it Right from the Start: Local Regulation of Recreational Cannabis project, working in conjunction with Colantuono, Highsmith & Whatley, PC, which provided guidance as a municipal law firm, to help California cities and counties reduce negative health impacts of the legalization or recreational cannabis. Legalization is based on the idea that cannabis regulation should not primarily be a criminal justice issue. However, an unfettered market in cannabis should not be the substitute and is not more sensible for this potentially addictive intoxicant than for alcohol or tobacco, widely used substances which raise similar public health concerns as does cannabis. Rather, cannabis policy should be grounded in public health protection. Shifting from a criminal justice to a public health paradigm requires careful consideration of how to regulate commercial cannabis activity. Cannabis possesses special health risks, and appropriate tax policies can help reduce harm. Of particular concern is the impact of legalization on youth below age 25, because research suggests that use among youth carries special risks to the developing brain that are not present for older adults.[1],[2],[3] Legalization and taxation should have as a primary goal establishing a legal market while at the same time instituting policies to prevent or mitigate harm, particularly to youth. Cannabis, like alcohol and tobacco, is an addictive substance that should not be treated as an ordinary commodity in the marketplace.[4]
Current California law, based on 2016’s Proposition 64, provides only weak public health protections. In the absence of action at the local level, state law will permit a large-scale expansion of the legal cannabis industry which is already growing rapidly. Fortunately, Proposition 64 allows local governments to adopt policies that build on state law in a number of areas. This model addresses the area of taxation policy, and follows on the project’s December 2017 Model Local Retailing and Marketing Ordinance (see www.gettingitrightfromthestart.org).
The model was produced after in-depth interviews with dozens of stakeholders from local jurisdictions, community members, academic and research experts, regulators from other states, legal experts, community coalitions, dispensary owners, laboratory experts, manufacturers, clinicians working with addiction, and others. The model uses best available evidence from the fields of municipal revenue law, alcohol and tobacco control, public health, the experience of states that legalized earlier than California, and expert advice on best practices. Key challenges identified include the rapid growth of a market for high potency products, the declining popular perception of harm, evidence of clear and significant harms from use in several population groups, the extraordinary incentives to expand and diversify consumption in California given the enormity of our state’s crop and the fact that less than one-fifth is currently consumed in-state,[5] and the challenge of keeping marijuana-related income in low-income communities. This model ordinance seeks to address these challenges.
The basic philosophy underlying the model is that cannabis sales should be cautiously legalized to reduce the social harm of illegality, but that cannabis sale and consumption should not be normalized, and cannabis-related tax revenue should be reinvested in communities at greatest risk of substance abuse and poor health outcomes. These investments should seek to improve health, reduce social inequity, save health-care and other costs from substance abuse and other preventable illness, injury and premature death, and mitigate other social harms from substance abuse and incarceration. In light of lessons from the decades-long efforts to “denormalize” consumption of tobacco, consumption of cannabis should not be encouraged. It should not be viewed as the next great economic opportunity for our state. For example, daily use of cannabis by high school students was found to halve the high school graduation rate;[6] so promoting use is not socially or economically beneficial to our communities in the long run. Proliferation of a multitude of new forms of cannabis that are potentially more harmful, such as high potency products,[7],[8],[9],[10],[11],[12] if allowed at all, can be discouraged through tax policy.[13] Whatever economic returns this new legal industry brings should be shared by the communities that have been most affected by the war on drugs. Additionally, because local taxes must be approved by the voters in California, it asks voters to authorize tax ceilings, and leaves to local government a high degree of flexibility to adjust taxation levels over time. Given uncertainties about the future of California’s cannabis market and the need to avoid encouraging the black market, flexibility to adjust tax rates is advisable. The model is also written in such a way that it can be applied to adult-use or medical cannabis markets, or both.
The ordinary sales taxes imposed under Bradley-Burns Uniform Sales and Use Tax Law to benefit the state and local governments will apply to retail adult-use sales, but not to retail medical marijuana sales, in addition to the taxes imposed by this ordinance and the taxes the State imposes under Proposition 64. Sales and state taxes are administered by the California Department of Tax and Fee Administration. The tax under this ordinance would be administered by the City or County adopting it, along with other local business license taxes
We are happy to speak with you to discuss the reasoning behind the model and we welcome your input. This is a living and evolving document that will grow with your local experience and emerging evidence in addressing this new challenge, so periodic updating is expected.
As occurred in tobacco regulation, we believe that innovation and leadership for best practices will bubble up from cities and counties across the nation. We look to you to provide that leadership and to share your experience.
Note to Readers
This model ordinance is not intended as legal advice. For legal advice, readers should consult an attorney licensed in their state.
Table of Contents
RESOLUTION 7
Model Special Tax Ordinance 11
SECTION I. Title 11
SECTION II. Findings 12
SECTION III 14
CHAPTER XX CANNABIS BUSINESS TAXES 14
Sec. [XX.010]. Statement of Purpose 14
Sec. [XX.020]. Definitions 15
Sec. [XX.030]. Cannabis Business Tax 17
Sec. [XX.040]. Registration of Cannabis Business 19
Sec. [XX.050]. Payment Obligation 21
Sec. [XX.060]. Tax Payment Does Not Authorize Activity 21
Sec. [XX.070]. Cannabis Tax Is Not a Sales Tax 21
Sec. [XX.080]. Returns and Remittances 21
Sec. [XX.090]. Use of Proceeds; Audits 22
Sec. [XX.100]. Special Tax Community Advisory Board 22
Sec. [XX.110]. Refunds 24
Section [XX.120] Administration of the tax 25
Section [XX.130] Consistency with Business License Tax 25
Section [XX.140] Constitutionality and legality; Not a Sales Tax; Gann Limit 25
SECTION IV. Amendment 26
SECTION V. Severability 26
SECTION VI. California Environmental Quality Act Requirements 26
SECTION VII. Effective Date 27
SECTION VIII. Certification; Publication 27
References 28
RESOLUTION NO. ______
A RESOLUTION OF THE [CITY COUNCIL/BOARD OF SUPERVISORS] OF THE [CITY/COUNTY] OF [______], CALIFORNIA, ESTABLISHING [______], 20[__] AS THE DATE FOR A [GENERAL / SPECIAL] ELECTION ON A PROPOSED BALLOT MEASURE SEEKING VOTER APPROVAL OF A SPECIAL BUSINESS LICENSE TAX ON COMMERCIAL RETAIL SALE OF NONMEDICAL CANNABIS PRODUCTS IN THE [CITY/COUNTY]
WHEREAS, the [City/County] of [______] imposes license taxes upon businesses in the [City/County]; and
WHEREAS, these business license taxes are imposed to raise revenue and not for regulation; and
WHEREAS, the ordinance attached hereto as Exhibit “A” and incorporated herein by reference (the “Ordinance”) would impose a business license tax on persons engaged in commercial activity involving cannabis products in the [City/County] (the “Special Tax”); and
WHEREAS, if approved by the voters, the revenues from the Special Tax will be used to fund efforts to promote health and prevent the leading causes of preventable illness, injury and premature death including, substance abuse in the [City/County]] and to prevent negative social impact of drug-related incarceration; and [or specify other uses desired by the city/county]
WHEREAS, pursuant to Section [9222/9140] of the California Elections Code the [City Council/Board of Supervisors] may submit the Ordinance directly to the voters; and
WHEREAS, at a properly noticed meeting on [______], 20[__], the [City Council/Board of Supervisors] adopted this Resolution to order a [general / special] election on the Ordinance for [______], 20[__] (the “Election”), at which it will submit to the qualified voters in the [City/County], the Ordinance to impose a special tax on commercial activity involving cannabis in the [City/County].
NOW THEREFORE, BE IT RESOLVED by the [City Council/Board of Supervisors] of the [City/County] of [______] that:
1. The [City Council/Board of Supervisors] hereby [calls the Election on [date]] and submits the attached Ordinance to the qualified voters of the [City/County] to impose a special tax on commercial activity involving cannabis products in the [City/ unincorporated area of the County] (the “Measure”).
comment: The bracketed phrase is necessary if a Special Election has not been called by another resolution. If an election has been called, this phrase should be deleted.
Revenue & Taxation Code section 34021.5(a)(4) authorizes a County to impose a County-wide tax, applicable in cities and well as unincorporated area, with approval of votes in the area to be taxed (i.e., all voters or just those in the unincorporated area). County taxes in cities are uncommon and might draw opposition from city governments which wish to guard their own tax bases. Accordingly, this model assumes the tax will apply in a city or in county unincorporated area. It can be adjusted to apply throughout a County.
2. The type, rate, and method of collection of the tax are set forth in the Ordinance, the full text of which shall be printed and made available to voters pursuant to Section [9119 / 9223] of the California Elections Code.
3. The ballot label for the proposed Measure shall be submitted for a “Yes” or “No” vote as follows:
comment: The ballot label is the question printed on the ballot and the last thing voters read before casting their votes, thus it should be carefully considered. It is limited to 75 words and the Secretary of State recommends it be written at a 5th or 6th grade reading level. Elections Code section 13119 governs the ballot labels for tax measures.
[Option 1] Shall an ordinance be adopted to impose a business license tax of up to [15]% of gross receipts from cannabis business and up to $10 per square foot of grow area, to raise an estimated $[aa] per year until voters change or repeal it, to fund efforts to prevent substance abuse and addiction, promote health and prevent the leading causes of illness, injury and premature death, and reduce drug related incarceration;
comment: This model can be used to tax adult use cannabis, medical cannabis or both. It separately taxes cultivation from other cannabis activity, but the cultivation tax is a credit against the gross receipts taxes for businesses which cultivate and receive receipts in other ways, too.
[Option 2] Shall an ordinance be adopted to impose a business license tax of up to [15]% of gross receipts from cannabis business, plus 1% on highly potent products, per percent of THC content above [17]%, 20% on sweetened cannabis beverages and up to [$10] per square foot of grow area, to raise an estimated $[aa] annually until voters change or repeal it, to fund efforts to prevent substance abuse, promote health and reduce drug-related incarceration;
comment: Option 2 adds to the base model ordinance a higher tax on high-potency products and on cannabis infused sweetened beverage (such as sodas, teas or juices) to discourage their use and sale in the City/County and to make them less likely to be used by children and youth, who typically have less purchasing power than adults.
comment: Use of cannabis, especially frequent use, has significant negative health and social impacts including low birth weight, increased schizophrenia and psychoses, increased problem use and addiction, motor vehicle crashes, and respiratory disease.[14] Daily use may halve high school graduation rate.[15] An increasing body of literature suggests risks for heart disease.[16],[17] Effects are more severe when use starts young and is frequent, and with higher potency products.[18] For this reason it is of critical importance that communities collect and reinvest cannabis taxes in large part in community based policies, programs and environmental changes to create a healthier community, promote health and prevent substance use and addiction. It is also important to prevent and mitigate social conditions and criminal justice practices that have led to high and unjustly distributed rates of drug-related incarceration with long-term negative social impact as well as expense to government. Long experience with funds from tobacco taxation have shown that the investments in tobacco control, for example, were enormously cost-saving.[19]